01 Feb Building Value: Intellectual Property
In the previous article in this series we discussed the importance of scalability and defensibility in building value in a company. A key means to achieving both is establishing unique intellectual property as an asset of the company.
What is the ‘secret sauce’ that your company has which distinguishes you from your competitors?
The Coca-Cola Company goes to great lengths to maintain the secret nature of the recipe for their flagship soft drink. KFC protects Colonel Sanders’ Original Recipe and uses it as a central part of their marketing. Microsoft copyrights the source code of their software and obtains patents on key features and algorithms.
Intellectual property can take a lot of different forms and can be formally protected through patents or copyrights, or it may be informally protected by maintaining trade secrets or proprietary knowledgebases and processes.
Regardless of your industry, building and protecting your intellectual property is an important step to maximize the value of your business.
Building Your Intellectual Property
Every business creates value for customers in one way or another. Businesses do many different things, some of them are necessary for the efficient operation of the business, but don’t differentiate the business to customers.
In determining what intellectual property will have the most impact for your business, you need to start with what aspect of your business adds the most value to the customer. If you are a software company, then the key value may be the software products themselves or the method you have for designing and deploying your products. For a manufacturing company the value may be in the design of your products or it might be in the efficient manufacturing process which you use. For a services business, the value might be the accumulated knowledge of your team, which allows you to scale up quickly and on-board new workers with ease.
As the entrepreneur, if you focus on the area where you create the most value for the customer, and codify your ‘secret sauce’, then you will have the opportunity to both improve your company operationally and enhance its long-term value.
Protecting Your Intellectual Property
Coca-Cola’s secret recipe wouldn’t be much good if a disgruntled employee could simply post it on the Internet for anyone to see and duplicate. So, they go to extraordinary lengths to make sure that the complete recipe is only known to a handful of people, and you can bet that those people are very well paid and have iron-clad employment and non-disclosure agreements.
You may not want or need to go to the same lengths as The Coca-Cola Company, but there are a variety of mechanisms that an entrepreneur can use to protect their intellectual property, and thereby the value of their company:
- Patents – If you have a novel product or technology then you should consider patenting it. There are costs and downsides for filing patent applications (e.g. your patent and the technology behind it becomes public record). Patents can also be difficult and costly to enforce, especially for a small company and especially in certain vertical industries, such as software. Nevertheless, a well-written patent with defensible claims can be very valuable in some industries. We recommend that you talk to a good IP/patent attorney if you want to pursue this option.
- Employee Agreements – Putting in place Employment Agreements is something that many entrepreneurs overlook, only to find that potential acquirers require them to be executed before they will consummate an acquisition. Employee Agreements need not be onerous, but they should define terms of employment and clearly indicate the company’s rights to all intellectual property developed during employment.
- Non–Disclosure Agreements (NDA) – Employees, partners, and vendors may get access to critical information during work with your company. An NDA will protect your rights.
- IP Assignment Agreements with Contractors – Do you have third party contractors or vendors who are contributing to the development of your intellectual property? If you are paying for their labor, then their work could be considered ‘for hire.’ Your contracts with such third parties should clearly delineate ownership of any IP which results from the collaboration.
- Copyrights, Trademarks, and Service Marks – Other types of protections may be created, both formally and informally, depending upon your circumstances.
The value of your intellectual property is directly related to how well you protect it. It is never too early to secure your intellectual property. Basic legal forms are available online for free to help you get started. For more complicated needs, we recommend that you consult an attorney.
Bottom Line for the Entrepreneur
Intellectual property is a key part of the value of your business, so you should:
- Define what intellectual property is key to delivering value to your customers
- Codify that intellectual property to support the operations of your company and to increase its long-term value
- Protect your intellectual property with the appropriate legal means
- Ensure that you have employee agreements and NDAs in place with those who have access to your IP